Why strategic purchasing in health and public financial management are two sides of the same coin

Public Financial Management (PFM) applies to the way government budgets are allocated, spent, and accounted for to implement policies. Strategic purchasing in health relates to how health service providers are paid for the delivery of services. Both aim for efficient, and equitable delivery of quality services. While it is documented that PFM and health financing should better align, it is less clear to many practitioner how to do this.

Building on an active health finance and PFM engagement by the World Bank, Global Financing Facility, and USAID/Abt Associates in Tanzania, this blog illustrates five ways in which these disciplines are really two sides of the same coin.

1. Determining who spends the money. For PFM practitioners, public hospitals, health centers or dispensaries are spending units or cost centers. In order to receive a budget allocation for spending, these spending units or cost centers need to be explicitly recognized in the government’s chart of accounts.

Health finance practitioners, however, refer to them as service providers. From their perspective, service providers plan, assemble, manage, and deliver the services provided to patients. Strategic purchasing of services allows them to match payments to these services for patients.

In Tanzania, service providers were introduced into the chart of accounts so they can be recognized in the budget. This was the first step necessary in the country’s PFM reform process to provide them a budget. Equally, it can also be considered the first step to introduce strategic purchasing.

2. Formulating a budget or paying the provider? PFM practitioners refer to developing a budget for a spending unit. This determines the resource envelope the spending unit will have in the coming fiscal year and is oftentimes specified by line items.

Conversely, the resource envelope for a service provider in health financing terms will be determined by the purchasing modality. So how much a provider will be paid will depend on the level and quality of services delivered. In health financing terms, inputs are not purchased, but rather service providers are paid against the services or outputs that are delivered.

In Tanzania, the budget allocation process to service providers reflects strategic purchasing principles by introducing an output orientation into the budget allocation process, such as the number of outpatient visits or the number of newborn deliveries performed.

3. Who pays for services? From a PFM perspective, the ministry of finance releases the budget to spending units or facilities.

Health finance practitioners speak instead of a purchaser who pays service providers. The purchaser can be an insurance agency, but the ministry of finance or health, or a local government entity may also act as the de facto purchaser if it releases funds to providers. A purchaser/provider split is recommended to recognize the role of the purchaser in paying for outputs and to incentivize the delivery of high-quality services. This also helps to distinguish the role of the service provider in procuring inputs, producing services, and managing delivery.

In Tanzania the purchaser/provider split is achieved by the Treasury (or Ministry of Health or the National Health Insurance Fund) acting as the de-facto purchasing agency and the President’s Office of Regional Administration and local government managing the service providers. 

4. Execute the budget or let providers spend? Who is authorized to procure inputs is where the rubber hits the road. In PFM terms, the execution of budget happens at the spending unit level and is often subjected to rigorous internal controls. Only inputs that were explicitly budgeted for can be procured.

For health finance practitioners this is problematic as it is thought to infringe on provider autonomy, accountability, and their ability to effectively react to changing needs in delivering services. In this discourse, the paying agency should be more concerned about monitoring the services that were delivered than the inputs that were procured.

How to extend flexibility in a PFM system to public providers during the execution of the budget is subject to ongoing debate. Even in Tanzania, input-based controls at the provider level prevail, albeit with the possibility of transfer within certain expenditure categories.    

5. Accounting and reporting is the same across disciplines. Accounting and reporting will always happen against inputs, regardless of the payment modality.

In a PFM system, financial management information systems execute spending at the spending unit level and facilitate accounting and reporting.

Providers in a health finance system also have to account for inputs purchased and report against this to provide a basis for financial accountability.

In Tanzania, a dedicated system was implemented at over 24,000 health facilities and schools in order to enable better accounting and reporting, and district authorities provide basic financial management support.      

It is critical that PFM and health finance practitioners engage in reforms that are mutually supportive to reach shared goals of more equitable, efficient, and high-quality public services for the benefit of citizens and communities.  It is even more crucial in the context of responding effectively to health emergencies such as COVID-19. This requires conceptual clarity and mutual understanding of basic principles and processes in each other’s discipline.